How to stay outside of IR35
Part 5: There's no black and white here - just several shades of grey. Here we try to help highlight what to do to keep in the safe zone.
Here’s the final part in our series - and probably the part you’ve been waiting to read the most. However, I'll be honest here. There’s no exact science to making sure you’re outside IR35 and no specific recipe to follow. Instead by now you have hopefully realised that there’s a number of factors that need consideration and it’s the balance of them all that are taking into account. Even if we do our best to follow all the guidance, we’re still potentially subject to a HMRC investigation, challenge and determination. Therefore, there are no guarantees that following these steps will solve all your potentials issues, but they will help strengthen your case.
With this in mind, it’s important to ensure that IR35 status reviews is something that becomes a routine review. This will not only help the parties involved to remain compliant, but also help in making records whilst they are relevant to support your case should there ever be an enquiry from HMRC.
For those of you that have read the previous section, you will see that there are a number of elements to make sure you are aware of in determining your IR35 status. As a recap, those are;
Personal Service and Substitution
Mutuality of Obligation (MOO)
Part and Parcel
In business on your own account (IBOYOA)
Provision of Equipment
Intention of the Parties
Making sure these are all considered and documented in your contract will be the start of making sure you’re at least pointing in the right direction. This however is only the starting position, and a contract is not simply enough to decide upon your actual status. Therefore, ongoing monitoring and regular reviews are important factors to also make provisions for.
The following steps will help to secure your status further and, in most parts, involve gathering evidence and building yourself a defence file that might later be useful. Afterall, one of the steps we have discussed previously is to demonstrate that you have taken reasonable care - having an defence or evidence file pre-prepared will support this requirement as it will show that you have considered;
Prior to signing a contract
Status Determination Statements (SDS)
Hirers or companies employing the services of a contractor are required to provide an SDS providing a detailed overview of the assessment. Without this, no assurance should be given or taken as to the IR35 status. Therefore, it is important NOT to sign a contract until an SDS has been reviewed.
Assess the IR35 status online
We have pointed previously to the use and existence of HMRC’s CEST tool that is supposed to help with determining an IR35 status. However, it has also been suggested that this tool is short-sighted and has been argued against by HMRC themselves. There are other tools and services out there that can better CEST - such as ‘IR35 Shield'. They offer a case law-backed assessment. Follow steps like this evidences the reasonable care requirement also.
If found outside IR35, the contractor may continue to operate. But if found inside IR35 the contractor may which to negotiate a better rate or elements of the contract itself so that it might become outside IR35. When negotiating the contract, a legal expert may be required to properly advise on the changes and the impacts both short-term and long-term.
Review the documentation
Since the written contract is often the first thing HMRC will look into, it’s important to ensure that every section is reviewed against the potential IR35 status and reflects the reality of what each party intends to happen in terms of the operation of the contract. If there are any middle parties between the ultimate hiring party and the contractor, it may be wise to review all the contracts to ensure consistency throughout the documentation.
After you are satisfied with ALL of the above, sign the contracts
After signing the contracts
Monitor the contract
This is the second most likely area for HMRC to review as it will either reinforce the paper contract or make it worthless. Any investigation will look into what is written and what actually happens and will use their findings in a tribunal. Therefore it is important to ensure that what is written is what is happening.
Monitoring the contract will allow you to keep on top of anything that might deviate from the IR35 status and ensure it does not change over time as well as give you the opportunity to gather evidence.
Gathering evidence along the performance of the contract to support the contract and the IR35 status is key. This demonstrates an element of reasonable care but will also save you a lot of unnecessary time at a later stage if you have not done this along the way. Gathering evidence later is time-consuming and harder to do. Investigations can happen at any time within 6 years of a contract. Going back over 6 years of records is not going to be easy - therefore begin recording evidence now to make it easy later.
Evidence that supports the 10 items we opened this section with is what you will need to have available.
Build a defence file
Once each contract ends, a final review or re-review should take place. This re-review should also include gather all the evidence to support the final review and justify a final determination of the IR35 status. This sounds like a long-winded task that could take several hours. There are ways to make this more manageable using technology - like meta-tagging evidence files with contract names and evidence titles. Having this built will not only put you in a very strong starting position, but it will also give you peace-of-mind that the work is done and already documented should a future issue ever arise.
Clauses you should consider when reviewing a contract
Contracts contain many clauses about the works being undertaken. Here are a few specifically linked to an IR35 status that you may wish to consider;
Contractor finds and pays for their own substitutes if they are not available (supporting Personal service and substitution)
Contractor decides how they work (supporting control)
New works are subject to new contracts (supporting MOO and IBOYOA)
Contractor sets their own hours (supporting control)
Engagement is for a fixed term (supporting part and parcel)
Contractors pay their own expenses (supporting financial risk)
Contractors do not receive holiday or sick pay (supporting financial risk)
Contractors provide their own tools (supporting provision of equipment)
Intentions of the parties is documented (supporting the contractor is working via their limited company and that the hirer is engaging the limited company for services)
As mentioned at the start of this final section - there is no specific formula to get this right. It is a careful balance of a number of factors. However, good knowledge, preparation and consider of all of the factors will set you in a good place to secure the outcome you're looking to achieve.
We hope that you have found this guide useful to help you navigate through your responsibilities and now consider yourself to be well-informed. If you have any questions, you’d like us to consider on this topic, please get in touch.